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This crisis is revealing which businesses really matter – the ‘rooted firms’

Will Brett

31 March 2020

There’s a lot of soul-searching going on right now, much of it at the personal and domestic level. But as millions ask themselves what’s really important in their own lives, many too are asking similar questions about the economy, and what must change once we come out of this quiet nightmare. Which parts of our economic activity are genuinely essential? Who deserves to be bailed out by the state? And when the chips are down, what do we expect of big business?

Business, in particular, is under the spotlight. Before the Covid-19 crisis hit, the global business community was already in full chin-stroking mode. A wave of populist revolt had shaken the consensus on globalisation. This rebellion seemed underpinned by widespread anger at some of globalisation’s apparent by-products: inequality, environmental damage and the hollowing out of former industrial communities. None of this was good for business as usual. So business leaders were starting to ask themselves searching questions, seeking to define their role in society beyond generating returns for their shareholders – hence all the talk of ‘purpose’ in the last two years or so.

Crisis can help to clarify what really matters. Now that fulfilling basic human needs has become a major logistical challenge, talk of ‘purpose’ has given way to hard-edged decision-making. The businesses which have a role in meeting those needs don’t need to worry about their ‘purpose’ – it speaks for itself. And many of those that don’t are in a fight for survival.

That’s why to understand the business response to this crisis it’s important to look beyond PR stunts. Brewdog pulled off a coup by producing heavily branded hand sanitiser; Uber is offering free rides to NHS workers. But whatever social good these actions do, they tell us much more about the quality of these companies’ comms and public affairs functions than they do about their true ‘purpose’.

If you look instead at the core business model – at what a firm does, and how it is structured to do it – you can see that many of the businesses navigating this crisis well have something in common. They are what the Foundational Economy Collective, a group of European economists, would describe as a ‘grounded’ or ‘rooted’ firm: a business with long-term links and relationships into its various stakeholders (its customers, its workers, its supply chain and the wider communities where these groups are based).

The rooted firm is often a small or micro business with an intimate understanding of its own community (like many of the businesses which I work with through the Guardians of the Arches). These types of firm often do more than provide goods or services. They can bring people together, invest in local skills, and give places a sense of meaning and distinctiveness. Their value goes well beyond their contribution to GDP. And while many are inevitably struggling to survive the crisis as their turnover falls to zero, their longer-term value proposition is increasingly obvious to people starved of face-to-face connection with their local community. And the loyalty of their customer base, sustained through genuine relationships over the long term, puts them on course for a sharp rebound.

But ‘rootedness’ can be found in big companies too. The Foundational Economy Collective point out that Morrison’s owns many of the farms, factories and processing units which supply its stores. That puts the retailer in long-term relationship with much of its supply chain, as well as its customers and staff who benefit from this unusually stable business model.

There is a distinctive part of the economy with huge potential for ‘rootedness’. As the virus takes hold, the genuinely essential parts of our economy are revealed – the things we rely on every day, and which we used to take for granted before Covid-19. This is the so-called ‘foundational economy’: health services, emergency services, water, energy, transport, food supply, telecommunications and so on. We cannot really do without these, and so they are continuing while almost everything else grinds to a halt.

Most of the firms in the foundational economy, whether they previously behaved in a ‘rooted’ way or not, have been pushed by this crisis into closer relationship with their various communities. The supermarkets, for instance, have taken on the immense strain of this moment with calm and responsibility. As demand soars, there are no signs of profiting from people’s distress. The supermarkets’ social responsibility is an almost inevitable by-product of the fact they are offering essential goods and services.

Even Amazon, hardly the darling of corporate social responsibility, could come out of this crisis with a stronger reputation as well as a stronger bottom line – simply because the service it offers is increasingly essential. (Although whether it takes this opportunity will depend on its ability to balance the different demands of its various stakeholders – not just fulfilling its customers’ needs but keeping its workforce safe at the same time. And its record on employee welfare is, to put it lightly, not good.)

The crisis has shown that working in the foundational economy is a form of public service whether or not the organisation you work for is formally in the public sector. Some parts of the foundational economy are firmly in the purview of the state, like health and emergency services. Others, like food supply, are not. But at this moment of crisis, we expect all of them to do their public duty. Solidarity with NHS workers is immediate and instinctive in this country. But there are signs, too, of solidarity with supermarket workers and others still going to work to serve our essential needs.

In other words, this crisis is revealing the huge potential for social good residing in the foundational sectors of our economy. The question is: can that good be sustained once the crisis is over?

Meanwhile, many companies outside the foundational economy are finding it harder to navigate the crisis with their reputation intact. In 2018, a joint venture between giant private equity firm Blackstone and giant property management firm Telereal Trillium bought much of Network Rail’s commercial property, which mainly consisted of railway arches, for £1.5bn in one of the UK’s largest ever real estate deals. The sale was controversial because many of the rooted small businesses which operate out of the arches were worried that their already inflated rents were going to be jacked up further, pushing them out of business. The subsequent campaign forced the new owners to promise to ‘put tenants first’, but it was never quite clear what that would mean in practice.

Covid-19’s clarifying effect has done its work on the arches too, revealing the true state of affairs. For seven anxious days after the government’s decision to close down much of the economy, the landlord insisted that the small businesses based in the arches could only defer their rental bills for three months. The resulting debt would have crippled many of the most profitable businesses in the country, let alone some of the tight-margin operations in the arches whose turnover had dropped to zero. It was only after some public shaming of the landlords in the media that they backed down and offered to waive rents altogether.

Other landlords with a closer relationship to their stakeholders – like the brewery Fuller’s, and the Grosvenor and Cadogan estates – moved much quicker to offer commercial tenants rent-free periods. These are family-owned businesses with long back-stories, rooted in particular places. However patchy their record might be in serving their communities in the past, they at least have a history of being in relationship with them. The Blackstone private equity model doesn’t allow for this kind of rooted approach. Put simply, to purchase assets they tend to take on large amounts of debt. That makes them much more likely to be rooted in their lenders’ concerns than in the concerns of their tenants or wider stakeholders.

The truth is that some business models speak more readily to our urgent human needs and desires than others. Now is the time to put rooted firms first. These are the companies that really matter – whether they are small businesses filling our lives with meaning and connection, training up the workforce and making places feel special; or bigger businesses fulfilling our essential needs.

Putting rooted firms first would require at least two big shifts in British economic policy. Firstly, we can’t carry on prioritising national productivity growth when it means abandoning small and medium-sized firms in relatively unproductive parts of the country. We have to give regions and localities real freedom to pursue their own economic policy so they can help build local supply chains and support a sustainable network of rooted local firms.

As this crisis works its way into our collective psyche, many are asking serious, almost existential questions about their purpose in life. The search for answers does not stop at the golden gates of the ‘economy’. What do we really care about? What work is truly meaningful? And which businesses get it? By putting rooted firms first, we can start to bring the economy closer to home.

Will Brett is a campaigns and communications consultant. He was previously Director of Communications at the New Economics Foundation; willbrett.info.